Answer to Question #102121 in Microeconomics for komalpreet kaur

Question

Explain and illustrate the following statement:
“ A deficit on the balance on current account will impose severe constraints upon domestic
economic policies” (10 marks)

Answer 1

These clearly shows that the firm is making loses.In other words the firm has more debts compared to profits. These leads the government to impose policies which strains its citizens so as to cover the loses made. policies include:

1. Taxation - the government increases taxes in order to get more money to support the firm(s).The increase strains its citizens to pay the increased taxes.
2. Money supply - since the government is lacking money, it will reduce money supply in the country so as to gather more and cover the loses they are making in the firm(s).
3. Money spending - the government will try as much as possible to reduce the amount of money they are spending. They will reduce expenditure so as to save more to cover the loses.
4. Unemployment - since the firm is making loses which means it cannot sustain some employees hence they will need to reduce number of employees.
5. Reduction of salary - the workers may experience reduction of salaries due to inability to pay the the amount earlier quoted.
6. Lagging of projects - some projects will be put on hold to due lack of money in order to solve the immediate threat.